I cover the video game industry, write about gamers, and review video games.
You can follow me on Twitter and hit me up there if you have any questions or comments you'd like to chat about.
Disclosure: Many of the video games I review were provided as free review copies. This does not influence my coverage or reviews of these games.
I do not own stock in any of the companies I cover. I do not back any Kickstarter projects related to video games. I do not fund anyone in the industry on Patreon.

Zynga's Decline Points To Much Bigger Problems

Zynga probably should have avoided copying games from major players like EA.

Ten months ago, social-gaming giant Zynga IPO’d at $10 a share.

The intervening months have not been kind to Zynga, however, and this past Friday was no exception as stocks plummeted even further on news that the game publisher projects somewhere in the ballpark of $90 to $105 million in Q3 losses.

Currently Zynga shares are down $7.52 since the IPO, resting at a precarious $2.48.

In less than a year, Zynga has seen its value slashed by 75%. But it’s not as though people have suddenly stopped playing Facebook games. So what happened?

TechCrunch’s Josh Constine helps lay out the groundwork for Zynga’s decline in an excellent piece on the company’s current struggles.

Rising ad costs, a more difficult time spamming on Facebook, and the sudden shift to mobile were all major contributions to Zynga’s downward spiral, Constine argues, and he’s right on every point.

But this leaves out two other important factors.

The Clone Wars

First off, Zynga’s business model has been historically geared toward rapid but ultimately unsustainable growth.

Here’s how it works:

Zynga spots a successful app like NimbleBit’s Tiny Tower and decides that it could be a lucrative IP. So they attempt to acquire the developer outright.

When that fails, Zynga tosses together a copycat IP that looks, feels, and plays almost exactly like the original.

When NimbleBit refused to be bought out by Zynga, the publisher soon came out with Dream Heights, a game with an uncanny resemblance to Tiny Tower.

“Even when you refuse to go work for Zynga, sometimes you end up doing work for Zynga anyway,” NimbleBit’s David Marsh tweeted at the time.

And NimbleBit is hardly alone. Numerous social and mobile games have been cloned by Zynga.

Whether or not they’re ever held accountable for the blatant copying – and you need only a pair of eyes to see how egregious it has been – the fact remains: Zynga has largely built its company on the backs of other companies and its IPs on the backs of the ideas and hard work and ingenuity of other people.

That Zynga has spent so much of its time and money simply finding what’s already worked and trying to either own it or reproduce it reveals a company largely uninterested in innovation or originality, two key components to long-term success especially in the highly competitive gaming industry.

Users, it appears, are getting tired of both the types of games Zynga is selling and the fact that so many seem so familiar.

The Little Bubble

The second problem is just as important if not more so because it’s hardly unique to Zynga. In fact, this problem is one that’s infected much of the internet at the moment, including giants like Facebook.

That problem is enthusiasm.

The first internet bubble was pretty much a foregone conclusion. Back in the world wide web’s stone age days, everyone thought you could make money online but nobody quite understood how you could make it actually happen.

Nevertheless, lots and lots of money went pouring into online ventures that rapidly went belly up. Only a few companies survived the fiery explosion of that first internet bubble – companies like Google and Amazon, for instance.

These companies went on to show how money really could be made online. And they made lots and lots of money.

Over the past decade we’ve seen the rise of two separate but complementary phenomenons online.

First, we’ve seen social media take root and begin to evolve. MySpace quickly gave way to Facebook, and Facebook remains the king of the hill.

Second, and more importantly, we’ve seen the rise of online ecosystems, or platforms, that include – but are not limited to – social media.

Once upon a time the internet was divvied up by portals like Yahoo! and search engines like Google, and you used the internet in a pretty free-wheeling, search-oriented manner.

This is slowly changing with the rise of the all-encompassing platform.

Google is no longer just a search giant. Google manufactures hardware, has their Android operating system in millions of devices, and has its own sort-of-social-media site Google+.

What the company is actually doing with all of this is creating a Google ecosystem. Theoretically, you could spend all your online time linked in some way to your Google experience, both on your PC and on your phone and someday on many other gadgets as well, including your car.

Or you could live in the Apple ecosystem, with all your files synced up with the iCloud, tapping away at your iPhone or iPad and watching your TV on iTunes.

Maybe you’re more of an Amazon type, though, with your Kindle Fire and your Amazon Prime.

Whatever platform you use (and you almost certainly dip your toes into more than just one) the fact of the matter is that the rise of social media, mobile, streaming television, ebooks, and successful online retail (to name a few) has created an online economy that works and that actually makes money.

The problem is that for many of the companies making money online, it’s hard to say how likely this burst of rapid initial growth will turn into long-term financial success.

A company like Zynga rides the wave of social media enthusiasm and that wave crests into a successful IPO that then crashes on the rocky shores of reality just months or weeks later.

Like Zynga, Facebook was a privately held company that kept its financial cards close to its chest and basked in the warm glow of intoxicating hype.

Even a movie was made about the company and its founder Mark Zuckerberg (and it was a pretty good movie, too.) Facebook was on its way to cultivating the same magic and mystique Apple and Steve Jobs were shrouded in.

Only, unlike Apple, Facebook shares are on wobbly footing at best.

And, of course, the list goes on.

GroupOn’s 2011 IPO was the biggest since Google went public in 2004, but GroupOn’s $20 IPO shares have since dropped to just over $5.

It’s painful to watch.

Still, however painful, this is not the same sort of bubble as the first internet boom-and-bust.

The problem with enthusiasm in tech is that it’s hard to predict the direction of the future. It’s hard to predict the rise of mobile gaming and the sudden decline of Facebook gaming, for instance.

The Honeymooners

These companies actually do have profitable business models, so long as we manage expectations.

The problem is that actual value and growth are not in line with the unrealistic expectations that fueled their IPOs in the first place.

For that matter, to say that Zynga is declining may not even be accurate. We may simply have a more accurate portrait of the company’s true value now that the sheen of enthusiasm has worn off after those heady IPO days.

The recent spate of disappointing IPOs makes one thing clear: the honeymoon period is over.

Companies like Google, Apple, and Amazon that have created diverse software/hardware ecosystems have an advantage over companies like Facebook which rely so heavily on advertising dollars.

Meanwhile, the gaming industry as a whole should check their enthusiasm over mobile and social gaming. These gaming niches have seen rapid growth in the past few years and will likely continue to grow – but not forever, and certainly not at this pace.

I suspect that app users will eventually sour on the free-to-play model that so many of these games rely on for revenue. If that happens, companies like Zynga, Gameloft, and numerous others in the app industry face yet another challenge in the future.

As talent continues to flee Zynga, with the recent departure of the Words With Friends co-founders only the latest in a long parade of lost human capital, and the game maker faces a serious legal challenge from EA over its Sims clone The Ville, not only will the company need to invest more in crafting original IPs rather than simply buying or copying other success stories, it will need to adopt more realistic expectations for growth.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

Comments

It was obvious, with Groupon, Zynga, Facebook, that their IPOs would be highly overvalued, would hit a peak, then drop from there. It’s like everyone wants to be part of the money pot and once one person sees it’s over, it all just snowballs down.

Maybe it’s because getting an IPO just simply doesn’t matter anymore for most companies. You can get private investments and be just fine, without needing to bend to stockholders. Unless, of course, you just want loads of money and are fine with killing your company or product with it.

The one thing that irks me most though is that people don’t believe Apple is exactly the same as everything else now. The court system being as slow as it is, it might take a while, but eventually Apple will be facing many court cases, draining their phone supply in the market and most likely forcing them to pay other companies per iPhone sold a price, or just being outright import banned.

There is no reason for their stock to be worth so much, all they have is the iPhone that makes them money, with the iPad being much less of a cash cow and all their other products barely selling compared to anything else.

I’m not outright anti-Apple, but I am all for competition and Apple is anti-competition.

Apple may indeed be overvalued, but they have advantages that many of these other companies don’t have such as fierce brand loyalty and actual tangible goods, not to mention the app store, iTunes, etc. Apple and Amazon and Google are all in strong positions compared to companies like Facebook thanks largely to the hardware component.

Your well-written article missed one important point about social media: the dramatic shift in internet usage from desktop to mobile. Ever since Apple launched the iPhone in 2007, more people access Facebook on mobile today than on the desktop due in no small part to the rise of smartphones. Zynga’s early success had to do with the rapid ascent of web-based social-media platforms such as Facebook. But the rapid shift from desktop to mobile has undermined the business models of both Zynga and Facebook. The above chart showing progressively lower peak usage of Zynga’s web-based games means that web-based social-media platforms such as Facebook has already peaked.

I actually glossed over mobile to a degree because it was one of the points in the article I link to and I was trying to add other points rather than regurgitate those ones. But yes, you’re absolutely right that mobile has been a big part of this shift.

That’ true enough, but for companies like Amazon, Google, and Microsoft, they own large manufacturing places, many, many office spaces, employee thousands upon thousands of people, are diversitized through many different areas.

Apple only is making bank on their iPhone, they have a headquarters and retail shops and relies on consumer ignorance to charge more than double the price it costs them to make their phones. iTunes isn’t all it’s cracked up to be, and never has been, and with all Apples major rivals and many smaller ones in play there, they’re slowly losing market share they can never regain there.

My real problem is the huge overvaluation, while Microsoft has more or less remained steady since they dominated everyone.

I believe your assessment is right. I see alot of the dotcom bubble in the social/mobile space.

You have alot of companies/people thinking you can throw anything at Facebook/Phones/Tablets, and it’ll make massive money. Then there’s a public largely participating for the novelty factor, but not heavily invested in the “Dream”.

Then you have companies abandoning existing markets with the belief that they’re all going to make a million billion dollars just by releasing some so-so app, and they can’t go ten minutes without telling us all how “This is the future!”. Worse, the existing market (Gamers) want nothing to do with this future.

Finally, you have these app makers actually showing relatively small revenues, and the granddaddy of them all is showing losses because of the high cost just to obtain a single customer.

It’ll all burst over the next 12-18 months, with high-profile failures. (Rovio’s a good example of one to watch for. The market thinks they’re an unstoppable force, but they’re really riding a wave of novelty and a fad)

EA may be in trouble, but they at least their problems are not down to having creative talent left in house – or at least not until they all decide to go elsewhere. EA’s problems stem from simply being greedy and not giving their creative talent the time needed to produce anything of note. (Although as I’ve noted more than once you can’t give the creative side too much time or they’ll never finish – such as with Duke Nukem).

Zynga however seems to have no creative talent of its own, or if it does they are kept safely locked away in the same hidden vault they keep their morals. This means that unlike EA there seems zero potential for Zynga to turn things around by creating products people will want.

In a biological/business sense EA (and other similar large developers) are bacteria who may or may not be able to ‘evolve’ to better fit into the (business) environment they now find themselves in – but they do have the potential to do so as their ‘DNA’ (meaning the staff) has the needed information within it to bring about the needed changes.

Zynga is more like a participially virulent virus which doesn’t grow but simply takes over and destroys ‘cells’ and moves on. Like a virus Zynga seems to be headed towards a time where it has either killed off those it feeds on (small developers), or those developers will have worked up a resistance to them . Either way Zynga is going to starve and die rather quickly – which is what we may well be seeing here.

Of course the virus analogy could be used for EA as well, since they too have a reputation for taking over smaller developers and running them into the ground. But as I said they do seem to try and keep the creative talent there, even if they do only pay them lip-service.

The consensus seems to be that I accurately predicted this decline, and explained why, 15 months ago in the analysis I did for 2K Games: http://gameful.org/group/games-for-change/forum/topics/zynga-analysis-1